Inside MLS expansion: Q&A with sports economist John Vrooman

Is the salary cap hurting American soccer? Is the so-called beautiful game, destined to become our next national pastime?

Here are some key questions CNBC emailed back and forth with Vanderbilt University sports economist John Vrooman. The topic: The economics underlying the future of professional American soccer. Below is an edited excerpt of the conversation.

Q: How does a league decide how many teams it should have? Is the MLS being smart with a jump from 19 teams now, to a planned 24 by 2020?

A: After a critical mass is formed usually in multiples of 8, a sports league will expand as long as the marginal (extra) benefits of expansion are greater than the extra costs of expansion. The costs of expansion are usually the extra demand placed on increasingly diluted talent supply. When the National Hockey League added 9 teams in 9 years, player salaries went from 50 percent of revenues to over 70 percent just before the lockout of 2004-05 because they had expanded too rapidly.

In a revenue sharing league like the MLS the costs of expansion also involve the reduction in the national TV packages, which are usually divided equally among clubs. The MLS TV revenues have just tripled in value from about $30 million to $90 million annually in an 8-year deal with ESPN/Univision and Fox.

Source: Orlando City Soccer Club

Rendering for the Orlando City Stadium in Orlando, Florida.

A league will still expand beyond the league profit max point if they charge an expansion fee that compensates the League for the present value of the lost cash flow. So with 19 clubs the TV money would be about $4.7 million but with 5 new clubs (to get to 24) the share would drop to $3.75 million. The new clubs are to some degree responsible for the increase rights fees (MLS expansion may have even been one of the chips in media rights negotiations). This is one reason why the MLS expansion fees may be approaching $90-$100 million and why the expansion fees vary directly with the size of TV money and the amount of revenue that is shared.

Q: The MLS has a salary cap. Is that keeping it exciting, or forcing it to always be a lesser league than its European peers?

A: No, the purpose of the salary cap is simply to control player costs and generate profits for the marginal clubs with the same pretzel logic as an infant industry tariff. This creates a large windfall gain for the larger revenue clubs. (The league has been experimenting with a designated player exception since the arrival of David Beckham in 2007.) So the MLS has the greatest earning disparity of any professional sports league in North America.

The MLS salary cap is currently set at $3.1 million (designated players excluded), which is below the projected club TV share of $3.75 million for 24 clubs, $4.7 million for the current 19 clubs. (In other words, teams are currently making $1.6 million more than they're allowed to spend on players—a sum that could be put forward to ease the cap.)

There are no salary caps in the premier divisions of European football, and the cap must be relaxed if MLS wants to attract talented international players in their prime.

Getty Images

David Beckham No. 23 of the Los Angeles Galaxy chases after the ball during an MLS match against the Montreal Impact at the Olympic stadium.

Q: Is increased interest in the international sport of soccer (from the World Cup) easily leveraged to increase interest in American soccer?

A: Yes, there is post World Cup excitement, but the buzz is usually killed within 2-3 years. The key to MLS is to locate where there is a significant presence of European or Latin American demographic groups. Their love and appreciation of the beautiful game is inbred as part of the culture of these groups. For example, witness the political ramifications of Brazil's World Cup performance.

More people across the board watch the seasonal matches between Real Madrid and Barcelona (El Clasico) than watch the Super Bowl (110 million). The Olympics are the most watched sporting event in the world, followed by the World Cup and then El Clasico. By comparison, MLS ratings (about 330,000 viewers per match) in the U.S. are below the English Premier League and about the same as the WNBA.

Q: Is there usually a defining turning point for the popularity of a sport (as some are claiming we've seen this summer for soccer), or do these things happen in fits and starts?

A: Yes, but the turning point is cultural and it must evolve and cannot be taught. Major League Baseball was "America's pastime" until 1967 until the NFL blew past the pastime because of its co-evolution with TV and especially color TV.

Q: And finally, if soccer does in fact become more popular, will this necessitate a decrease in popularity for another major sport in the U.S.?

A: Not necessarily because of the regional specificity of the fan base, but perhaps the most vulnerable would be MLB because of the relative importance of the gate and the relatively large proportion of Latin American players. Soccer fans are more like NHL fans: They are few, but they are tenacious, dedicated and knowledgeable about the subtleties of the game not apparent to the impatient North American viewers. In the end, U.S. soccer must compete with way too many other culturally specific North American sports, so the drift toward the beautiful game will be slow moving.